August 5, 2008

MOSCOW. Aug 5 (Interfax) - Oleg Deripaska's Basic Element (BasEl) and Lunsin, a subsidiary of China's Sinopec and member of the Zijing mining group, have agreed on the joint construction of a combined heat and power (CHP) plant which will be fuelled by coal mined at the Kaa-Khem strip mine in the Russian internal republic of Tuva, the Kommersant newspaper reported.

"A preliminary agreement was reached at a meeting on Monday. The talks will continue," the paper quoted Andrei Plugar, BasEl's deputy general director for investments, as saying.

Kommersant said it was believed that the project would give UC RUSAL, the aluminum giant that is part of BasEl, certain advantages when doing business in China.

Dina Oyun, aide to Tuva's prime minister, said the CHP plant project was an aspect of Lunsin's project to develop the Kyzyl- Tashtyg polymetallic ore field, with overall B+C1+C2 resources of 12.9 million tonnes, including C2 copper ore - 2 million tonnes and C1 pyrite ore - 6.2 million tonnes. The Kyzyl-Tashtyg field is located in Todjin district of Tuva, 120 km northeast of Kyzyl. The main minerals are zinc, lead, copper, barium and sulfur, with incidental reserves of gold, silver, cadmium and selenium.

Lunsin, which was founded by the Zijing mining holding, won the license to the field at a tender in April 2006, paying 742.5 million rubles, or way above the starting price, which was 270 million rubles. It completed designs for a mine and concentrating plant in December 2007. The tender rules stated that the mine must be brought on stream in five years.

The Tuva government said on Tuesday that Lusin had now started to build the mining complex. It said the plans had passed state appraisal on May 29. Design capacity of 1 million tonnes of ore per year should be reached in 2012. More than 20 million rubles have been invested in the mine since the start of this year. The metal produced, particularly zinc, will be exported to China.

The Tuva government confirmed that Lusin intended to participate in the power plant project.

Overall project costs at the Kyzyl-Tashtyg field are $206 million. "But, in order to achieve design capacity, the Chinese company has decided to build a CHP plant in the republic, which will help resolve the energy shortage," said Dina Oyun. "The plant will probably be built close to Kyzyl, but a final decision has not yet been reached," she said.

In April, the head of Tuva, Sholban Kara-ool, suggested co- investment in the construction of a modular CHP plant to run on the Kaa-Khem coal. It would take up to three years to build the plant, which would have capacity of 200-300 megawatts. Nikolai Sosnovsky, an analyst at Sobinbank, estimated that it would cost $350 million- $400 million to build a plant like that.

It is thought BasEl might acquire the Kaa-Khem strip mine itself, with the potential to produce 900,000 tonnes of coal per year, and which is currently in the second stage of bankruptcy.

"In any event the experts are confident that involvement in the project with Lunsin will be to BasEl's advantage," Kommersant said.

Dmitry Baranov, senior expert at Finam Management, said he thought the partnership would enable the Chinese company's money to be put to use in developing reserves in East Siberia, the Trans- Baikal region and Far East, as potential markets already exist.

"It's quite possible that BasEl will be able to lobby for RUSAL's interests in China, given the company's plans to go into the Chinese aluminum market," said Sobinbank's Sosnovsky.